Sub Filer Id
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

 
FORM 10-Q
 

(Mark One)

x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the quarterly period ended March 31, 2007.
 
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the transition period from              to             .

Commission File Number 1-6028

LINCOLN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 

 
   
                Indiana                
        35-1140070        
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
1500 Market Street, Suite 3900, Philadelphia, Pennsylvania
    19102-2112    
(Address of principal executive offices)
(Zip Code)
 
(215) 448-1400
Registrant’s telephone number, including area code
 
Not Applicable
Former name, former address and former fiscal year, if changed since last report
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer x Accelerated filer ¨Non- accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨No  x
 
As of May 1, 2007, there were 270,773,385 shares of the registrant’s common stock outstanding.



Item 1. Financial Statements
LINCOLN NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS

   
March 31,
 
December 31,
 
 
 
2007
 
2006
 
 
 
(Unaudited)
 
 
 
 
 
(in millions)
 
ASSETS
             
Investments:
             
Securities available-for-sale, at fair value:
             
Fixed maturity (cost: 2007-$55,268; 2006-$54,960)
 
$
56,256
 
$
55,853
 
Equity (cost: 2007-$682; 2006-$681)
   
714
   
701
 
Trading securities
   
2,910
   
3,036
 
Mortgage loans on real estate
   
7,416
   
7,384
 
Real estate
   
406
   
421
 
Policy loans
   
2,767
   
2,760
 
Derivative investments
   
413
   
415
 
Other investments
   
967
   
918
 
Total investments
   
71,849
   
71,488
 
Cash and invested cash
   
900
   
1,621
 
Deferred acquisition costs and value of business acquired
   
8,535
   
8,420
 
Premiums and fees receivable
   
375
   
356
 
Accrued investment income
   
919
   
866
 
Amounts recoverable from reinsurers
   
8,132
   
7,939
 
Goodwill
   
4,521
   
4,500
 
Other assets
   
2,948
   
2,770
 
Assets held in separate accounts
   
83,147
   
80,534
 
Total assets
 
$
181,326
 
$
178,494
 
               
LIABILITIES AND SHAREHOLDERS' EQUITY
             
Liabilities
             
Insurance and investment contract liabilities:
             
Insurance policy and claim reserves
 
$
15,014
 
$
14,771
 
Investment contract and policyholder funds
   
58,729
   
58,817
 
Total insurance and investment contract liabilities
   
73,743
   
73,588
 
Short-term debt
   
593
   
658
 
Long-term debt:
             
Senior notes
   
2,383
   
2,231
 
Junior subordinated debentures issued to affiliated trusts
   
155
   
155
 
Capital securities
   
1,571
   
1,072
 
Reinsurance related derivative liability
   
230
   
229
 
Funds withheld reinsurance liabilities
   
2,121
   
2,094
 
Deferred gain on indemnity reinsurance
   
741
   
760
 
Other liabilities
   
4,610
   
4,972
 
Liabilities related to separate accounts
   
83,147
   
80,534
 
Total liabilities
   
169,294
   
166,293
 
               
Commitments and Contingencies (See Note 9)
             
Shareholders' Equity
             
Series A preferred stock-10,000,000 shares authorized (2007 liquidation value-$1)
   
1
   
1
 
Common stock-800,000,000 shares authorized (shares issued and outstanding:
             
2007- 270,685,522; 2006- 275,752,668)
   
7,318
   
7,449
 
Retained earnings
   
4,054
   
4,138
 
Accumulated other comprehensive income:
             
Net unrealized gain on securities available-for-sale
   
528
   
493
 
Net unrealized gain on derivative instruments
   
47
   
39
 
Foreign currency translation adjustment
   
168
   
165
 
Funded status of employee benefit plans
   
(84
)
 
(84
)
Total accumulated other comprehensive income
   
659
   
613
 
Total shareholders' equity
   
12,032
   
12,201
 
Total liabilities and shareholders' equity
 
$
181,326
 
$
178,494
 
 
See accompanying Notes to Consolidated Financial Statements

1


LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
 
   
Three Months Ended
 
 
 
March 31,
 
 
 
2007
 
2006
 
   
(Unaudited)
 
   
(in millions, except per share amounts)
 
Revenue
             
Insurance premiums
 
$
459
 
$
78
 
Insurance fees
   
779
   
475
 
Investment advisory fees
   
90
   
78
 
Communications revenue (net)
   
67
   
-
 
Net investment income
   
1,090
   
678
 
Realized gain (loss)
   
26
   
(1
)
Amortization of deferred gain on indemnity reinsurance
   
19
   
19
 
Other revenue and fees
   
140
   
95
 
Total revenue
   
2,670
   
1,422
 
Benefits and Expenses
             
Benefits
   
1,194
   
582
 
Underwriting, acquisition, insurance and other expenses
   
805
   
503
 
Communications expense
   
41
   
-
 
Interest and debt expense
   
61
   
22
 
Total benefits and expenses
   
2,101
   
1,107
 
Income before taxes
   
569
   
315
 
Federal income taxes
   
173
   
94
 
Net income
 
$
396
 
$
221
 
               
Net Income Per Common Share
             
Basic
 
$
1.44
 
$
1.27
 
Diluted
 
$
1.42
 
$
1.24
 
 
 See accompanying Notes to Consolidated Financial Statements

2


LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

   
Three Months Ended March 31,
 
   
2007
 
2006
 
   
(Unaudited)
 
   
(in millions, except for share amounts)
 
Series A Preferred Stock
         
Balance at beginning-of-year
 
$
1
 
$
1
 
Balance at end-of-period
   
1
   
1
 
Common Stock
             
Balance at beginning-of-year
   
7,449
   
1,775
 
Issued for acquisition
   
20
   
-
 
Stock compensation/issued for benefit plans
   
41
   
35
 
Deferred compensation payable in stock
   
3
   
8
 
Retirement of common stock
   
(195
)
 
-
 
Balance at end-of-period
   
7,318
   
1,818
 
Retained Earnings
             
Balance at beginning-of-year
   
4,138
   
4,082
 
Cumulative effect of adoption of SOP 05-1
   
(41
)
 
-
 
Cumulative effect of adoption of FIN 48
   
(15
)
 
-
 
Comprehensive income (loss)
   
442
   
(23
)
Less other comprehensive income (loss) (net of Federal income tax):
             
Net unrealized gain (loss) on securities available-for-sale, net of
             
reclassification adjustment
   
35
   
(278
)
Net unrealized loss on derivative instruments
   
8
   
28
 
Foreign currency translation adjustment
   
3
   
6
 
Net income
   
396
   
221
 
Retirement of common stock
   
(317
)
 
-
 
Dividends declared:
             
Common (2007-$.395; 2006-$.38)
   
(107
)
 
(67
)
Balance at end-of-period
   
4,054
   
4,236
 
Net Unrealized Gain on Securities Available-for-Sale
             
Balance at beginning-of-year
   
493
   
497
 
Change during the period
   
35
   
(278
)
Balance at end-of-period
   
528
   
219
 
Net Unrealized Gain on Derivative Instruments
             
Balance at beginning-of-year
   
39
   
7
 
Change during the period
   
8
   
28
 
Balance at end-of-period
   
47
   
35
 
Foreign Currency Translation Adjustment
             
Balance at beginning-of-year
   
165
   
83
 
Change during the period
   
3
   
6
 
Balance at end-of-period
   
168
   
89
 
Minimum Pension Liability Adjustment
             
Balance at beginning-of-year
   
-
   
(60
)
Balance at end-of-period
   
-
   
(60
)
Funded Status of Employee Benefit Plans
             
Balance at beginning-of-year
   
(84
)
 
-
 
Balance at end-of-period
   
(84
)
 
-
 
Total shareholders' equity at end-of-period
 
$
12,032
 
$
6,338
 
 
See accompanying Notes to Consolidated Financial Statements

3


LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

-CONTINUED-

   
Three Months Ended March 31,
 
   
2007
 
2006
 
   
(Unaudited)
 
   
(Number of Shares)
 
           
Series A Preferred Stock
         
Balance at beginning-of-year
   
12,706
   
15,515
 
Conversion into common stock
   
(180
)
 
(550
)
Balance at end-of-period
   
12,526
   
14,965
 
               
Common Stock
             
Balance at beginning-of-year
   
275,752,668
   
173,768,078
 
Conversion of series A preferred stock
   
2,880
   
8,800
 
Stock compensation/issued for benefit plans
   
2,144,891
   
2,107,311
 
Retirement of common stock
   
(7,214,917
)
 
-
 
Balance issued and outstanding at end-of-period
   
270,685,522
   
175,884,189
 
Common stock at end-of-period:
             
Assuming conversion of preferred stock
   
270,885,938
   
176,123,629
 
Diluted basis
   
274,004,126
   
178,468,931
 
 


See accompanying Notes to Consolidated Financial Statements

4


LINCOLN NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Three Months Ended
 
   
March 31,
 
   
2007
 
2006
 
   
(Unaudited)
 
   
(in millions)
 
Cash Flows from Operating Activities
             
Net income
 
$
396
 
$
221
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Deferred acquisition costs and value of business acquired
   
(206
)
 
(80
)
Premiums and fees receivable
   
(19
)
 
(20
)
Accrued investment income
   
(53
)
 
(6
)
Policy liabilities and accruals
   
243
   
(9
)
Net trading securities purchases, sales and maturities
   
126
   
(45
)
Gain on reinsurance embedded derivative/trading securities
   
-
   
(6
)
Contractholder funds
   
281
   
201
 
Pension plan contribution
   
-
   
(1
)
Amounts recoverable from reinsurers
   
(193
)
 
27
 
Federal income taxes
   
(186
)
 
68
 
Stock-based compensation expense
   
15
   
9
 
Depreciation
   
13
   
14
 
Increase in funds withheld liability
   
27
   
46
 
Realized loss (gain) on investments and derivative instruments
   
(26
)
 
7
 
Amortization of deferred gain
   
(19
)
 
(19
)
Other
   
70
   
(82
)
Net adjustments
   
73
   
104
 
Net cash provided by operating activities
   
469
   
325
 
Cash Flows from Investing Activities
             
Securities-available-for-sale:
             
Purchases
   
(5,017
)
 
(1,836
)
Sales
   
3,705
   
1,285
 
Maturities
   
972
   
494
 
Purchase of other investments
   
(603
)
 
(529
)
Sale or maturity of other investments
   
514
   
569
 
Increase in cash collateral on loaned securities
   
(288
)
 
(35
)
Other
   
(124
)
 
(69
)
Net cash used in investing activities
   
(841
)
 
(121
)
Cash Flows from Financing Activities
             
Payment of long-term debt
   
(314
)
 
-
 
Issuance of long-term debt
   
749
   
-
 
Net increase (decrease) in short-term debt
   
150
   
(109
)
Universal life and investment contract deposits
   
2,177
   
1,179
 
Universal life and investment contract withdrawals
   
(1,968
)
 
(1,139
)
Investment contract transfers
   
(574
)
 
(432
)
Common stock issued for benefit plans and excess tax benefits
   
52
   
26
 
Retirement of common stock
   
(512
)
 
-
 
Dividends paid to shareholders
   
(109
)
 
(67
)
Net cash used in financing activities
   
(349
)
 
(542
)
Net decrease in cash and invested cash
   
(721
)
 
(338
)
Cash and invested cash at beginning-of-year
   
1,621
   
2,312
 
Cash and invested cash at end-of-period
 
$
900
 
$
1,974
 

See accompanying Notes to Consolidated Financial Statements

5


LINCOLN NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation
 
Lincoln National Corporation and its majority-owned subsidiaries (“LNC” or the “Company,” which also may be referred to as “we”, “our” or “us”) operate multiple insurance and investment management businesses as well as a broadcasting and sports programming business through seven business segments (see Note 10). The collective group of businesses uses “Lincoln Financial Group” as its marketing identity. Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products and solutions. These products include institutional and/or retail fixed and indexed annuities, variable annuities, universal life insurance, variable universal life insurance, term life insurance, mutual funds and managed accounts. We report less than majority-owned entities in which we have at least a 20% interest on the equity basis.

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions for the Securities and Exchange Commission Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, the information contained in the notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”) should be referred to in connection with the reading of these interim unaudited consolidated financial statements.

On April 3, 2006, we completed our merger with Jefferson-Pilot Corporation (“Jefferson-Pilot”), and have included the results of operations and financial condition of Jefferson-Pilot in our consolidated financial statements beginning on April 3, 2006. The unaudited consolidated financial statements for the three months ended March 31, 2006 exclude the results of operations and financial condition of Jefferson-Pilot.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the results. Operating results for the three month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007. All material intercompany accounts and transactions have been eliminated in consolidation.

Certain amounts reported in prior periods’ unaudited consolidated financial statements have been reclassified to conform to the 2007 presentation. These reclassifications have no effect on net income or shareholders’ equity of the prior periods.

2. Changes in Accounting Principles and Changes in Estimates
 
Statement of Position 05-1 - Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts. In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting for deferred acquisition costs (“DAC”) on internal replacements of insurance and investment contracts. An internal replacement, defined by SOP 05-1, is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Contract modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue and deferred sales inducements from the replaced contract must be written-off. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006.


6


We adopted SOP 05-1 effective January 1, 2007 by recording decreases to the following categories in our Consolidated Balance Sheets:

(in millions)
     
Assets
       
Deferred acquisition costs
 
$
31
 
Value of business acquired
   
35
 
Other assets - deferred sales inducements
   
3
 
Total assets
 
$
69
 
         
Liabilities and Shareholders' Equity
       
Investment contract and policyholder funds - deferred front end loads
 
$
2
 
Insurance policy and claim reserves - guaranteed minimum death benefit annuity reserves
   
4
 
Other liabilities - income tax liabilities
   
22
 
Total liabilities
   
28
 
         
Retained earnings
   
41
 
         
Total liabilities and shareholders' equity
 
$
69
 

The adoption of this new guidance primarily impacts our Individual Markets Annuities and Employer Markets Group Protection businesses, and our accounting policies regarding the assumptions for lapsation used in the amortization of DAC and value of business acquired (“VOBA”). In addition, the adoption of SOP 05-1 resulted in a $6 million pre-tax increase to underwriting, acquisition, insurance and other expenses on our Consolidated Statements of Income in the first three months of 2007, which was attributable to changes in DAC and VOBA deferrals and amortization.

FASB Interpretation No. 48 - Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 requires an entity to determine whether it is “more likely than not” that an individual tax position will be sustained upon examination by the appropriate taxing authority prior to any part of the benefit being recognized in the financial statements. The amount recognized would be the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement, along with any related interest and penalties (if applicable). Upon adoption of FIN 48, the guidance will be applied to all tax positions, and only those tax positions meeting the “more likely than not” threshold will be recognized or continue to be recognized in the financial statements. In addition, FIN 48 expands disclosure requirements to include additional information related to unrecognized tax benefits, including accrued interest and penalties, and uncertain tax positions where the estimate of the tax benefit may change significantly in the next twelve months. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective January 1, 2007 by recording an increase in the liability for unrecognized tax benefits of $15 million in our Consolidated Balance Sheets, offset by a reduction to the beginning balance of retained earnings. See Note 4 for more information regarding our adoption of FIN 48.

SFAS No. 155 - Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” (“SFAS 155”), which permits fair value remeasurement for a hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. Under SFAS 155, an entity may make an irrevocable election to measure a hybrid financial instrument at fair value, in its entirety, with changes in fair value recognized in earnings. SFAS 155 also: (a) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”); (b) eliminates the interim guidance in SFAS 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” and establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are either freestanding derivatives or hybrid financial instruments that contain an embedded derivative requiring bifurcation; (c) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (d) eliminates restrictions on a qualifying special-purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument.
 
In December 2006, the FASB issued Derivative Implementation Group Statement 133 Implementation Issue No. B40,
7

 
“Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets” (“DIG B40”). Since SFAS 155 eliminated the interim guidance related to securitized financial assets, DIG B40 provides a narrow scope exception for securitized interests that contain only an embedded derivative related to prepayment risk. Under DIG B40, a securitized interest in prepayable financial assets would not be subject to bifurcation if: (a) the right to accelerate the settlement of the securitized interest cannot be controlled by the investor and (b) the securitized interest itself does not contain an embedded derivative for which bifurcation would be required other than an embedded derivative that results solely from the embedded call options in the underlying financial assets. Any other terms in the securitized financial asset that may affect cash flow in a manner similar to a derivative instrument would be subject to the requirements of paragraph 13(b) of SFAS 133. The guidance in DIG B40 is to be applied upon the adoption of SFAS 155.

We adopted the provisions SFAS 155 and DIG B40 on January 1, 2007. Prior period restatement was not permitted. The adoption of SFAS 155 did not have a material impact on our consolidated financial condition or results of operations.

SFAS No. 157 - Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes a framework for measuring fair value under current accounting pronouncements that require or permit fair value measurement. SFAS 157 retains the exchange price notion, but clarifies that exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the most advantageous market for that asset or liability. Fair value measurement is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset, or nonperformance risk which would include the reporting entity’s own credit risk. SFAS 157 establishes a three-level fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The highest priority is given to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs in situations where there is little or no market activity for the asset or liability. In addition, SFAS 157 expands the disclosure requirements for annual and interim reporting to focus on the inputs used to measure fair value, including those measurements using significant unobservable inputs, and the effects of the measurements on earnings. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007. Retrospective application is required for certain financial instruments as a cumulative effect adjustment to the opening balance of retained earnings. We expect to adopt SFAS 157 effective January 1, 2008, and are currently evaluating the effects of SFAS 157 on our consolidated financial condition and results of operations.

SFAS No. 159 - The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which allows an entity to make an irrevocable election, on specific election dates, to measure eligible items at fair value. The election to measure an item at fair value may be determined on an instrument by instrument basis, with certain exceptions. If the fair value option is elected, unrealized gains and losses will be recognized in earnings at each subsequent reporting date, and any upfront costs and fees related to the item will be recognized in earnings as incurred. In addition, the presentation and disclosure requirements of SFAS 159 are designed to assist in the comparison between entities that select different measurement attributes for similar types of assets and liabilities. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS 157. At the effective date, the fair value option may be elected for eligible items that exist on that date. The effect of the first remeasurement to fair value shall be reported as a cumulative effect adjustment to the opening balance of retained earnings. We expect to adopt SFAS 159 effective January 1, 2008, and are currently evaluating the items to which we may apply the fair value option and the effect on our consolidated financial condition and results of operations.
 
3. Business Combination

On April 3, 2006, we completed our merger with Jefferson-Pilot by acquiring 100% of the outstanding shares of Jefferson-Pilot in a transaction accounted for under the purchase method of accounting prescribed by SFAS No. 141, “Business Combinations” (“SFAS 141”). Jefferson-Pilot’s results of operations are included in our results of operations beginning April 3, 2006. As a result of the merger, our product portfolio was expanded, and we now offer fixed and variable universal life, fixed annuities, including indexed annuities, variable annuities, mutual funds and institutional accounts, 401(k) and 403(b) offerings, and group life, disability and dental insurance products. We also own and operate television and radio stations in selected markets in the Southeastern and Western United States and produce and distribute sports programming.
 
SFAS 141 requires that the total purchase price be allocated to the assets acquired and liabilities assumed based on their fair values at the merger date.


8


The aggregate consideration paid for the merger was as follows:

(in millions, except share data)
 
Share Amounts
     
LNC common shares issued
   
112,301,906
       
Purchase price per share of LNC common share (1)
 
$
48.98
       
Fair value of common shares issued
       
$
5,501
 
Cash paid to Jefferson-Pilot shareholders
         
1,800
 
Fair value of Jefferson-Pilot stock options (2)
         
151
 
Transaction costs
         
66
 
Total purchase price
       
$
7,518
 
               
(1)  
The value of the shares of LNC common stock exchanged with Jefferson-Pilot shareholders was based upon the average of the closing prices of LNC common stock for the five day trading period ranging from two days before, to two days after, October 10, 2005, the date the merger was announced.
(2)  
Includes certain stock options that vested immediately upon the consummation of the merger. Any future income tax deduction related to these vested stock options will be recognized on the option exercise date as an adjustment to the purchase price and recorded to goodwill.

The fair value of Jefferson-Pilot’s net assets assumed in the merger was $4.2 billion. Goodwill of $3.3 billion resulted from the excess of purchase price over the fair value of Jefferson-Pilot’s net assets. The amount of goodwill that is expected to be deductible for tax purposes is approximately $24 million. We paid a premium over the fair value of Jefferson-Pilot’s net assets for a number of potential strategic and financial benefits that are expected to be realized as a result of the merger including, but not limited to, the following:

·  Greater size and scale with improved earnings diversification and strong financial flexibility;
·  Broader, more balanced product portfolio;
·  Larger distribution organization; and
·  Value creation opportunities through expense savings and revenue enhancements across business units.

The following table summarizes the fair values of the net assets acquired as of the acquisition date:

(in millions)
 
Fair Value
 
Investments
 
$
27,910
 
Due from reinsurers
   
1,296
 
Value of business acquired
   
2,486
 
Goodwill
   
3,324
 
Other assets
   
1,693
 
Assets held in separate accounts
   
2,574
 
Insurance and investment contract liabilities
   
(26,641
)
Long-term debt
   
(905
)
Income tax liabilities
   
(782
)
Accounts payable, accruals and other liabilities
   
(863
)
Liabilities related to separate accounts
   
(2,574
)
Total purchase price
 
$
7,518
 

9


The goodwill resulting from the merger was allocated to the following segments:

(in millions)
     
Individual Markets:
       
     Life Insurance
 
$
1,318
 
     Annuities
   
997
 
    Total Individual Markets
   
2,315
 
Employer Markets: Group Protection
   
268
 
Lincoln Financial Media
   
741
 
     Total goodwill
 
$
3,324
 
         
The following table summarizes the fair value of identifiable intangible assets acquired in the merger and reported in other assets.

       
Weighted
 
       
Average
 
       
Amortization
 
(in millions)
     
Period
 
Lincoln Financial Media:
             
FCC licenses
 
$
638
   
N/A
 
Sports production rights
   
11
   
5 years
 
Network affiliation agreements
   
10
   
21 years
 
Other
   
11
   
16 years
 
Total Lincoln Financial Media
   
670
       
Individual Markets - Life Insurance:
             
Sales force
   
100
   
25 years
 
Total indentifiable intangibles
 
$
770
       
               
Identifiable intangibles not subject to amortization
 
$
638
   
N/A
 
Identifiable intangibles subject to amortization
   
132
   
22 years
 
Total identifiable intangibles
 
$
770
       
               
 
 
10

4. Federal Income Taxes
 
The effective tax rate was 30.4% and 29.7% for the first quarter of 2007 and 2006, respectively. Differences in the effective rates and the U.S. statutory rate of 35% are the result of certain tax preferred investment income, foreign tax credits and other tax preference items. 
 
We are required to establish a valuation allowance for any gross deferred tax assets that are unlikely to reduce taxes payable in future years’ tax returns. At March 31, 2007, we believe that it is more likely than not that all gross deferred tax assets will reduce taxes payable in future years.

As discussed in Note 2, we adopted FIN 48 on January 1, 2007, and as of this date we had unrecognized tax benefits of $349 million of which $143 million, if recognized, would impact the effective tax rate. Also, as of the adoption date, we had accrued interest expense related to the unrecognized tax benefits of $51 million. We recognize interest and penalties, if any, accrued related to unrecognized tax benefits as a component of tax expense.

In the normal course of business we are subject to examination by taxing authorities throughout the United States and the United Kingdom. At any given time, we may be under examination by state, local or non-U.S. income tax authorities.

We are currently under audit by the Internal Revenue Service (“IRS”). LNC is currently under audit by the IRS for years 2003 and 2004. For the former Jefferson-Pilot Corporation and its subsidiaries, the IRS is examining the years 2004 and 2005. During the first quarter of 2006, the IRS completed its examination for the tax years 1999 through 2002 with assessments resulting in a payment that was not material to our consolidated results of operations. In addition to taxes assessed and interest, the payment included a deposit relating to a portion of the assessment, which we continue to challenge. We believe that this portion of the assessment is inconsistent with existing law and are protesting it through the established IRS appeals process. We do not anticipate that any adjustments that might result from such audits would be material to our consolidated results of operations or financial condition. It is likely that the IRS appeals process for the tax years 1996 to 1998 will conclude within the next twelve months. It is reasonably possible that a reduction in the unrecognized tax benefits may occur; however, quantification of an estimated range cannot be made at this time.

5. Supplemental Financial Data
 
A rollforward of DAC is as follows:

   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2007
 
2006
 
Balance at beginning-of-year
 
$
5,116
 
$
4,164
 
Cumulative effect of adoption of SOP 05-1
   
(31
)
 
-
 
Deferral
   
473
   
245
 
Amortization
   
(194
)
 
(148
)
Adjustment related to realized gains on securities available-for-sale
             
and derivatives
   
(13
)
 
(11
)
Adjustment related to unrealized (gains) losses on securities
             
available-for-sale and derivatives
   
(15
)
 
194
 
Foreign currency translation adjustment
   
2
   
5
 
Balance at end-of-period
 
$
5,338
 
$
4,449
 
               
 
11

 
A rollforward of VOBA is as follows:

   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2007
 
2006
 
Balance at beginning-of-year
 
$
3,304
 
$
999
 
Cumulative effect of adoption of SOP 05-1
   
(35
)
 
-
 
Business acquired
   
14
   
-
 
Deferral of commissions and accretion of interest
   
15
   
-
 
Amortization
   
(88
)
 
(17
)
Adjustment related to realized gains on securities
             
available-for-sale and derivatives
   
(5
)
 
-
 
Adjustment related to unrealized gains on securities
             
available-for-sale and derivatives
   
(10
)
 
-
 
Foreign currency translation adjustment
   
2
   
2
 
Balance at end-of-period
 
$
3,197
 
$
984
 
 
Realized gains and losses on investments and derivative instruments on the Consolidated Statements of Income for the three months ended March 31, 2007 and 2006 are net of amounts amortized against DAC and VOBA of $18 million and $11 million, respectively. In addition, realized gains and losses for both the three months ended March 31, 2007 and 2006, are net of adjustments made to policyholder reserves of $(2) million. We have either a contractual obligation or a consistent historical practice of making allocations of investment gains or losses to certain policyholders and to certain reinsurance arrangements.

A rollforward of deferred sales inducements, which is included in other assets on the Consolidated Balance Sheets, is as follows:

   
Three Months Ended
 
   
March 31,
 
(in millions)
 
2007
 
2006
 
Balance at beginning-of-year
 
$
194
 
$
129
 
Cumulative effect of adoption of SOP 05-1
   
(3
)
 
-
 
Deferral
   
23
   
16
 
Amortization
   
(8
)
 
(5
)
Balance at end-of-period
 
$
206
 
$
140
 
 
 Details underlying underwriting, acquisition, insurance and other expenses on the Consolidated Statements of Income are as follows:

   
Three Months Ended
 
 
 
March 31,
 
(in millions)
 
2007
 
2006
 
Commissions
 
$
515
 
$
242
 
General and administrative expenses
   
422
   
305
 
DAC and VOBA deferrals, net of amortization
   
(206
)
 
(80
)
Other intangibles amortization
   
4
   
2
 
Taxes, licenses and fees
   
66
   
34
 
Restructuring charges
   
4
   
-
 
Total
 
$
805
 
$
503
 
 
As discussed in Note 3, the excess of the purchase price for the Jefferson-Pilot merger over the fair value of net assets acquired totaled $3.3 billion.


12


The following summarizes the changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2007:

(in millions)
 
Balance at
December 31, 2006
 
Purchase Accounting and Other Adjustments
 
Balance at
March 31, 2007
 
Individual Markets:
                   
Life Insurance
 
$
2,181
 
$
(9
) 
$
2,172
 
Annuities
   
1,032
   
9
   
1,041
 
Employer Markets:
                   
Retirement Products
   
20
   
-
   
20
 
Group Protection
   
281
   
(13
)
 
268
 
Investment Management
   
262
   
-
   
262
 
Lincoln Financial Media
   
707
   
34
   
741
 
Lincoln UK
   
17
   
-
   
17
 
Total
 
$
4,500
 
$
21
 
$
4,521
 
 
Details of investment contract and policyholder funds on the Consolidated Balance Sheets are as follows:

   
March 31,
 
December 31,
 
(in millions)
 
2007
 
2006
 
Premium deposit funds
 
$
20,116
 
$
20,541
 
Other policyholder funds
   
37,492
   
37,197
 
Deferred front end loads
   
1,018
   
977
 
Undistributed earnings on participating business
   
103
   
102
 
Total
 
$
58,729
 
$
58,817
 
               


13


6. Insurance Benefit Reserves
 
We issue variable contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder (traditional variable annuities). We also issue variable annuity and life contracts through separate accounts that include various types of guaranteed minimum death benefit (“GMDB”), guaranteed minimum withdrawal benefit and guaranteed income benefit features. The GMDB features include those where we contractually guarantee to the contractholder either (a) return of no less than total deposits made to the contract less any partial withdrawals, (b) total deposits made to the contract less any partial withdrawals plus a minimum return, or (c) the highest contract value on any contract anniversary date through age 80 minus any payments or withdrawals following the contract anniversary.
 
The following table provides information on the GMDB features outstanding at March 31, 2007 and December 31, 2006. (Note that our variable contracts with guarantees may offer more than one type of guarantee in each contract; therefore, the amounts listed are not mutually exclusive). The net amount at risk is defined as the current guaranteed minimum death benefit in excess of the current account balance at the balance sheet date.

   
In Event of Death
 
 
 
March 31,
 
December 31,
 
(dollars in billions)
 
2007
 
2006
 
Return of Net Deposit
         
Account value
 
$
39.6
 
$
38.3
 
Net amount at risk
   
0.1
   
0.1
 
Average attained age of contractholders
   
54
   
54
 
Return of Net Deposits Plus a Minimum Return
             
Account value
 
$
0.4
 
$
0.4
 
Net amount at risk
   
-
   
-
 
Average attained age of contractholders
   
67
   
67
 
Guaranteed minimum return
   
5
%
 
5
%
Highest Specified Anniversary Account Value Minus
             
Withdrawals Post Anniversary
             
Account value
 
$
23.1
 
$
22.5
 
Net amount at risk
   
0.2
   
0.2
 
Average attained age of contractholders
   
64
   
64
 
 
The determination of the GMDB liabilities is based on models that involve a range of scenarios and assumptions, including those regarding expected market rates of return and volatility, contract surrender rates and mortality experience.

The following summarizes the liabilities for GMDB, which is recorded in insurance policy and claim reserves on our Consolidated Balance Sheets:

   
March 31,
 
March 31,
 
(in millions)
 
2007
 
2006
 
Balance at beginning of year
 
$
23
 
$
15
 
Cumulative effect of adoption of SOP 05-1
   
(4
)
 
-
 
Changes in reserves
   
6
   
4
 
Benefits paid
   
(2
)
 
(2
)
Balance at end-of-period
 
$
23
 
$
17
 
               
The changes to the benefit reserves amounts above are reflected in benefits in the Consolidated Statements of Income.

Also included in benefits are the results of the hedging program, which included losses of less than $1 million for GMDB for the three months ended March 31, 2007 and $2 million for the same period in 2006.

14


Separate account balances attributable to variable annuity contracts with guarantees are as follows:

   
March 31,
 
December 31,
 
(in billions)
 
2007
 
2006
 
Asset Type
         
Domestic equity
 
$
40.3
 
$
39.3
 
International equity
   
6.3
   
5.9
 
Bonds
   
6.8
   
6.4
 
Total
   
53.4
   
51.6
 
Money market
   
5.9
   
5.6
 
Total
 
$
59.3
 
$
57.2
 
Percent of total variable annuity separate account values
   
87
%
 
87
%
 
7. Employee Benefit Plans
 
Pension and Other Postretirement Benefit Plans 
 
As a result of our merger with Jefferson-Pilot, we maintain funded defined benefit pension plans for the former U.S. employees and agents of Jefferson-Pilot. The components of net defined benefit pension plan and postretirement benefit plan expense are as follows:

   
Pension Benefits
 
Other Postretirement Benefits
 
 
 
Three Months Ended
 
Three Months Ended
 
 
 
March 31,
 
March 31,
 
(in millions)
 
2007
 
2006
 
2007
 
2006
 
U.S. Plans
                         
Service cost
 
$
9
 
$
5
 
$
1
 
$
1
 
Interest cost
   
16
   
9
   
2
   
1
 
Expected return on plan assets
   
(20
)
 
(11
)
 
(1
)
 
-
 
Recognized net actuarial (gains) losses
   
-
   
1
   
-
   
-
 
Net periodic benefit expense
 
$
5
 
$
4
 
$
2
 
$
2
 
                           
Non-U.S. Plans
                         
Interest cost
   
5
   
4
             
Expected return on plan assets
   
(5
)
 
(4
)
           
Recognized net actuarial losses
   
1
   
1
             
Net periodic benefit expense
 
$
1
 
$
1
             
 
See Note 13 for information on a change to our retirement benefits.

See Note 8 to the consolidated financial statements in our 2006 Form 10-K for a detailed discussion of our other benefit plans.

8. Stock-Based Incentive Compensation Plans

See Note 9 to the consolidated financial statements in our 2006 Form 10-K for a detailed discussion of stock and incentive compensation.

We have various incentive plans for our employees, agents and directors and our subsidiaries that provide for the issuance of stock options, stock incentive awards, stock appreciation rights, restricted stock awards, restricted stock units (“performance shares”), and deferred stock units. Delaware Investments U.S., Inc. (“DIUS”) has a separate stock option incentive plan.
 
In the first quarter of 2007, a performance period from 2007-2009 was approved for our executive officers by the Compensation Committee. Executive officers participating in this performance period received one-half of their award in 10-year
15

 
LNC or DIUS stock options, with the remainder of the award in a combination of either: 100% performance shares or 75% performance shares and 25% cash. LNC stock options granted for this performance period vest ratably over the three-year period, based solely on a service condition. DIUS stock options granted for this performance period vest ratably over a four-year period, based solely on a service condition and were granted only to employees of DIUS. Depending on the performance, the actual amount of performance shares could range from zero to 200% of the granted amount. Under the 2007-2009 plan, a total of 725,161 LNC stock options were granted; 12,237 DIUS stock options were granted; and 126,879 LNC performance shares were granted.

In addition to the stock-based grants noted above, various other LNC stock-based awards were granted in the first quarter of 2007, which are summarized in the table below:

 
Three Months Ended
March 31, 2007
 
Awards
   
10-year LNC stock options
348,888
 
Non-employee agent stock options
158,075
 
Restricted stock units
222,656
 
Stock appreciation rights
187,750
 
 
9. Restrictions, Commitments and Contingencies

 See “Restrictions, Commitments and Contingencies” in Note 10 to the consolidated financial statements in our 2006 Form 10-K for a discussion of restrictions, commitments and contingencies, which information is incorporated herein by reference.

Guaranteed Investment Contracts

In December 2006, we invested $400 million in a secured limited recourse note issued by a third-party segregated portfolio company. In April 2007, we invested $200 million in a secured limited recourse note issued by the same portfolio company and $250 million in a secured limited recourse note issued by a second portfolio company. These companies entered into a credit default swap with a third party providing credit protection in exchange for a fee. Defaults in the underlying reference portfolio will only affect the note if cumulative losses of a synthetic reference portfolio exceed the loss attachment point on the portfolio. We have determined that we are not the primary beneficiary, as we do not hold the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with these entities is our recorded investment of $400 million as of March 31, 2007, and $850 million as of April 2007.

10. Segment Information

In the quarter ended June 30, 2006, we completed our merger with Jefferson-Pilot and changed our management organization. We also realigned our reporting segments to reflect the current manner by which our chief operating decision makers view and manage the business. All segment data for reporting periods have been adjusted to reflect the current segment reporting. As a result of these changes, we provide products and services in five operating businesses: (1) Individual Markets, (2) Employer Markets, (3) Investment Management, (4) Lincoln UK and (5) Lincoln Financial Media, and report results through seven business segments.

We also have “Other Operations,” which includes the financial data for operations that are not directly related to the business segments, unallocated corporate items (such as investment income on investments related to the amount of statutory surplus in our insurance subsidiaries that is not allocated to our business units and other corporate investments, interest expense on short-term and long-term borrowings, and certain expenses, including restructuring and merger-related expenses), along with the ongoing amortization of deferred gain on the indemnity reinsurance portion of the transaction with Swiss Re. Other Operations also includes the eliminations of intercompany transactions and the inter-segment elimination of the investment advisory fees for asset management services the Investment Management segment provides to Individual Markets and Employer Markets.
 
Segment operating revenue and income (loss) from operations are internal measures used by our management and Board of Directors to evaluate and assess the results of our segments. Operating revenue is GAAP revenue excluding realized gains and losses on investments and derivative instruments, gains and losses on reinsurance embedded derivative/trading securities, gains and losses on sale of subsidiaries/businesses and the amortization of deferred gain arising from reserve development on business sold through reinsurance. Income (loss) from operations is GAAP net income excluding net realized investment gains and losses, losses on early retirement of debt, reserve development net of related amortization on business sold through reinsurance and
 
16

cumulative effect of accounting changes. Our management and Board of Directors believe that operating revenue and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because net realized investment gains and losses, reserve development net of related amortization on business sold through reinsurance and cumulative effect of accounting changes are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. Operating revenue and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations.
 
The following table shows financial data by segment:

   
Three Months Ended
 
 
 
March 31,
 
(in millions)
 
2007
 
2006
 
Revenue
             
Segment operating revenue
             
Individual Markets:
             
Annuities
 
$
605
 
$
375
 
Life Insurance
   
971
   
500
 
Total Individual Markets
   
1,576
   
875
 
Employer Markets:
             
Retirement Products
   
359
   
306
 
Group Protection
   
361
   
-
 
Total Employer Markets
   
720
   
306
 
Investment Management (1)
   
150
   
140
 
Lincoln UK
   
91
   
70
 
Lincoln Financial Media (2)
   
67
   
-
 
Other Operations
   
75
   
61
 
Consolidating adjustments
   
(35
)
 
(29
)
Net realized investment results (3)
   
26
   
(1
)
Revenue
 
$
2,670
 
$
1,422
 
               
Net Income
             
Segment operating income
             
Individual Markets:
             
Annuities
 
$
121
 
$
66
 
Life Insurance
   
167
   
69
 
Total Individual Markets
   
288
   
135
 
Employer Markets:
             
Retirement Products
   
64
   
60
 
Group Protection
   
23
   
-
 
Total Employer Markets
   
87
   
60
 
Investment Management
   
16
   
15
 
Lincoln UK
   
11
   
11
 
Lincoln Financial Media
   
12
   
-
 
Other Operations
   
(35
)
 
-
 
Net realized investment results (4)
   
17
   
-
 
Net income
 
$
396
 
$
221
 
               

17


(1)    Revenues for the Investment Management segment include inter-segment revenues for asset management services provided to our other segments. These inter-segment revenues totaled $25 million for both the three months ended March 31, 2007 and 2006.
(2)    Lincoln Financial Media revenues are net of $8 million of commissions paid to agencies for the three months ended March 31, 2007.
(3)    Includes realized gains (losses) on investments of $26 million and $(11) million for the three months ended March 31, 2007 and 2006, respectively; realized gains on derivative instruments of $4 million for the three months ended March 31, 2006; and gains on reinsurance embedded derivative/trading securities of $6 million for the three months ended March 31, 2006.
(4)    Includes realized gains (losses) on investments of $17 million and $(6) million for the three months ended March 31, 2007 and 2006; realized gains on derivative instruments of $2 million for the three months ended March 31, 2006; and gains on reinsurance embedded derivative/trading securities of $4 million for the three months ended March 31, 2006.

11. Earnings Per Share
 
The income used in the calculation of our diluted earnings per share is our income before cumulative effect of accounting change and net income, reduced by minority interest adjustments related to outstanding stock options under the DIUS stock option incentive plan of less than $1 million for all periods presented.
 
A reconciliation of the denominator in the calculations of basic and diluted net income and income before cumulative effect of accounting change per share is as follows:

   
Three Months Ended
 
   
March 31,
 
   
2007
 
2006
 
Denominator: [number of shares]
             
Weighted-average shares, as used in basic calculation
   
274,889,645
   
174,577,421
 
Shares to cover conversion of preferred stock
   
200,960
   
243,371
 
Shares to cover non-vested stock
   
1,148,067
   
1,560,646
 
Average stock options outstanding during the period
   
14,322,952
   
8,850,988
 
Assumed acquisition of shares with assumed proceeds
             
and benefits from exercising stock options (at average
             
market price for the year).
   
(12,137,623
)
 
(7,778,439
)
Shares repurchaseable from measured but unrecognized
             
stock option expense
   
(255,647
)
 
(824,764
)
Average deferred compensation shares
   
1,308,460
   
1,300,430
 
Weighted-average shares, as used in diluted calculation
   
279,476,814
   
177,929,653
 
 
In the event the average market price of LNC common stock exceeds the issue price of stock options, such options would be dilutive to our earnings per share and will be shown in the table above. Participants in our deferred compensation plans that select LNC stock for measuring the investment return attributable to their deferral amounts will be paid out in LNC stock. The obligation to satisfy these deferred compensation plan liabilities is dilutive and is shown in the table above.

18


12. Restructuring Charges
 
2006 Restructuring Plan

Upon completion of the merger with Jefferson-Pilot, we implemented a restructuring plan relating to the integration of our legacy operations with those of Jefferson-Pilot. The realignment will enhance productivity, efficiency and scalability while positioning us for future growth.

The following is the detail of the reserve for restructuring charges:

(in millions)
 
Total
 
Restructuring reserve at December 31, 2006
 
$
8
 
         
Amounts incurred in the first three months of 2007
       
Employee severance and termination benefits 
   
1
 
Other 
   
3
 
 Total 2007 restructuring charges
   
4
 
Amounts expended in the first three months of 2007
   
(6
)
Restructuring reserve at March 31, 2007
 
$
6
 
         
Additional amounts expended in the first three months of 2007
       
that do not qualify as restructuring charges 
 
$
10
 
Total expected costs
   
180
 
         
Expected completion date
   
4th Quarter 2009
 
 
The total expected costs include both restructuring charges and additional expenses that do not qualify as restructuring charges that are associated with the integration activities. In addition, involuntary employee termination benefits were recorded in goodwill as part of the purchase price allocation (see Note 3). Merger integration costs relating to employee severance and termination benefits of $13 million were included in other liabilities in the purchase price allocation in 2006. The remaining liability balance at December 31, 2006 was $3 million. In the first quarter of 2007, an additional $8 million was recorded to goodwill and other liabilities as part of the final adjustment to the purchase price allocation related to employee severance and termination benefits. Through March 31, 2007 approximately $13 million of these costs were incurred and the remaining liability balance at March 31, 2007 was $8 million.

Restructuring charges for this plan in the first three months of 2007 were included in underwriting, acquisition, insurance and other expenses within Other Operations on the Consolidated Statements of Income.

13. Subsequent Event

On May 1, 2007, we announced plans to change the retirement benefits provided to employees, which include replacing traditional pension retirement benefits with a new defined contribution plan beginning January 1, 2008. This prospective change in benefits will not impact any of the pension retirement benefits that have already accrued to employees. On January 1, 2008, retirement benefits for employees will begin accruing through the new defined contribution plan. This change is not expected to be material to our future earnings, but will result in a one-time curtailment gain of $9 million ($6 million after-tax) in the second quarter of 2007, which will be reported within Other Operations.
 

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following is a discussion of the financial condition of Lincoln National Corporation and its consolidated subsidiaries (“LNC” or the “Company” which also may be referred to as “we” or “us”) as of March 31, 2007, compared with December 31, 2006, and the results of operations of LNC for the three months ended March 31, 2007 and 2006. On April 3, 2006, LNC completed its merger with Jefferson-Pilot Corporation (Jefferson-Pilot). Beginning on April 3, 2006, the results of operations and financial condition of Jefferson-Pilot, after being adjusted for the effects of purchase accounting, were consolidated with LNC’s. As part of the merger, we realigned our businesses to conform to the way we intend to manage and assess our business going forward. Accordingly, all prior period segment results have been adjusted to reflect the new segmentation. The financial information presented herein for the three months ended March 31, 2006, reflects only the accounts of LNC. The balance sheet information presented below is as of March 31, 2007 and December 31, 2006. The statement of operations information is for the three months ended March 31 for each respective year.
 
For more information regarding the completion of the merger, including the calculation and allocation of the purchase price, see Note 3 to the consolidated financial statements in this Form 10-Q.

This discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto presented in “Item 1” (“consolidated financial statements”) and “Item 7 Management’s Discussion and Analysis of Financial Condition, Results of Operations” (“MD&A”), “Item 1A Risk Factors” and “Item 8 Consolidated Financial Statements” in our latest annual report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”).

This report contains certain financial information determined by methods other than in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In addition to providing consolidated revenues and net income (loss), we also provide segment operating revenue and income (loss) from operations because we believe they are meaningful measures of revenues and the profit or loss generated by our operating segments. Operating revenue is GAAP revenue excluding realized gains and losses on investments and derivative instruments, gains and losses on reinsurance embedded derivative/trading securities, gains and losses on sale of subsidiaries/businesses and the amortization of deferred gain arising from reserve development on business sold through reinsurance. Income (loss) from operations is GAAP net income excluding net realized investment gains and losses, losses on early retirement of debt, reserve development net of related amortization on business sold through reinsurance and cumulative effect of accounting changes. Operating revenue and income (loss) from operations are the financial performance measures we use to evaluate and assess the results of our segments. Accordingly, we report operating revenue and income (loss) from operations by segment in Note 10 to our unaudited consolidated financial statements. Our management and Board of Directors believe that operating revenue and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because net realized investment gains and losses, reserve development net of related amortization on business sold through reinsurance and cumulative effect of accounting changes are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. Operating revenue and income (loss) from operations do not replace revenues and net income as the GAAP measures of our consolidated results of operations.

Certain reclassifications have been made to prior periods’ financial information to conform to the 2007 presentation.
 
Forward-Looking Statements—Cautionary Language
 
Certain statements made in this report and in other written or oral statements made by LNC or on LNC’s behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: “believe”, “anticipate”, “expect”, “estimate”, “project”, “will”, “shall” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, operations, trends or financial results. LNC claims the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
 
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements include, among others:

·
Problems arising with the ability to successfully integrate our and Jefferson-Pilot’s businesses, which may affect our
 
20

 
 
ability to operate as effectively and efficiently as expected or to achieve the expected synergies from the merger or to achieve such synergies within our expected timeframe;
 
 ·
 
Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, LNC’s products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserves and/or risk-based capital requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline VACARVM; restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform;
 
·
 
The initiation of legal or regulatory proceedings against LNC or its subsidiaries and the outcome of any legal or regulatory proceedings, such as: (a) adverse actions related to present or past business practices common in businesses in which LNC and its subsidiaries compete; (b) adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities, and extra-contractual and class action damage cases; (c) new decisions that result in changes in law; and (d) unexpected trial court rulings;
 
·
 
Changes in interest rates causing a reduction of investment income, the margins of LNC’s fixed annuity and life insurance businesses and demand for LNC’s products;
 
·
 
A decline in the equity markets causing a reduction in the sales of LNC’s products, a reduction of asset fees that LNC charges on various investment and insurance products, an acceleration of amortization of deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), deferred sales inducements (“DSI”) and deferred front-end loads (“DFEL”) and an increase in liabilities related to guaranteed benefit features of LNC’s variable annuity products;
 
·
 
Ineffectiveness of LNC’s various hedging strategies used to offset the impact of declines in and volatility of the equity markets;
 
·
 
A deviation in actual experience regarding future persistency, mortality, morbidity, interest rates or equity market returns from LNC’s assumptions used in pricing its products, in establishing related insurance reserves, and in the amortization of intangibles that may result in an increase in reserves and a decrease in net income, including as a result of investor-owned life insurance business;
 
·
 
Changes in accounting principles generally accepted in the United States (“GAAP”) that may result in unanticipated changes to LNC’s net income, including the impact of adopting Statements of Financial Accounting Standard 157 and 159;
 
·
 
Lowering of one or more of LNC’s debt ratings issued by nationally recognized statistical rating organizations, and the adverse impact such action may have on LNC’s ability to raise capital and on its liquidity and financial condition;
 
·
 
Lowering of one or more of the insurer financial strength ratings of LNC’s insurance subsidiaries and the adverse impact such action may have on the premium writings, policy retention, and profitability of its insurance subsidiaries;
 
·
 
Significant credit, accounting, fraud or corporate governance issues that may adversely affect the value of certain investments in the portfolios of LNC’s companies requiring that LNC realize losses on such investments;
 
·
 
The impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including LNC’s ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions;
 
·
 
The adequacy and collectibility of reinsurance that LNC has purchased;
 
·
 
Acts of terrorism, war, or other man-made and natural catastrophes that may adversely affect LNC’s businesses and the cost and availability of reinsurance;
 
·
 
Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that LNC can charge for its products;
 
·
 
The unknown impact on LNC’s business resulting from changes in the demographics of LNC’s client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life;
 
·
 
Loss of key management, portfolio managers in the Investment Management segment, financial planners or wholesalers; and
 
·
 
Changes in general economic or business conditions, both domestic and foreign, that may be less favorable than expected and may affect foreign exchange rates, premium levels, claims experience, the level of pension benefit costs and funding, and investment results.
 
21

 
The risks included here are not exhaustive. Other sections of this report and LNC’s annual report on Form 10-K, current reports on Form 8-K and other documents filed with the SEC include additional factors which could impact LNC’s business and financial performance. Moreover, LNC operates in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors.

Further, it is not possible to assess the impact of all risk factors on LNC’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, LNC disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
 
INTRODUCTION

Executive Summary

We are a holding company that operates multiple insurance and investment management businesses as well as broadcasting and sports programming business through subsidiary companies. Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products and solutions. These products include institutional and/or retail fixed and indexed annuities, variable annuities, universal life insurance, variable universal life insurance, linked-benefit universal life, term life insurance, mutual funds and managed accounts.
 
We provide products and services in five operating businesses: (1) Individual Markets, (2) Employer Markets, (3) Investment Management, (4) Lincoln UK and (5) Lincoln Financial Media, and are reporting results through seven business segments. These operating businesses and their segments are described in “Part I--Item 1--Business” of the 2006 Form 10-K.

Our strategic intent is to be “The Retirement Income Security Company”. Retirement income security represents all of the risks at various stages of the wealth management cycle, not just the risk of outliving income during retirement. We believe that the baby-boomer generation reaching retirement age will present an emerging opportunity for companies like ours that offer products allowing baby-boomers to better manage their wealth accumulation, retirement income and wealth transfer needs.

In 2007, we are launching a larger, unified product suite available to our distribution force. To this end and as discussed further below under “Recent Developments,” we reorganized our insurance subsidiaries by merging several insurance subsidiaries.

During 2007 we expect our major challenges to include:  

·
The continued, successful integration of the Jefferson-Pilot businesses and the success of our new unified product portfolio.
   
·
While recent increases in long-term rates have eased pressure on spreads, a continuation of the low interest rate environment creates a challenge for our products that generate investment margin profits, such as fixed annuities and universal life insurance.
 
 
·
The ability to generate tangible results from Retirement Income Security Ventures (“RISV”).
   
·
The continued, successful expansion of our wholesale distribution businesses.
   
·
The ability to improve financial results and sales growth in Employer Markets.
   
·
The continuation of competitive pressures in the life insurance marketplace, increased regulatory scrutiny of the life and annuity industry, which may lead to higher product costs and negative perceptions about the industry.
 
 
·
Continued focus by the government on tax reform, which may impact our products.
 
In the face of these challenges, there are three key themes that will influence our actions and decisions throughout 2007:
 
·
Taking market share. We are making sizeable investments in distribution throughout the organization, recognizing that sales growth is driven by our ability to maintain a strong presence in our key accounts and distribution channels.
   
·
Jumpstarting our RISV. The focus of this cadre of insurance professionals is to rethink the products, delivery systems and customer servicing that will address the emerging needs of the baby boomers.
   
 
 
22

 
·
Embedding financial and execution discipline in our operations. We are making significant investments in operating efficiencies while integrating and consolidating systems and processes across the organization. Investment decisions will be evaluated based on a comprehensive metrics-based approach.
 
Recent Developments

On March 8, 2007, we sold $500 million aggregate principal amount of our 6.05% Capital Securities due April 20, 2067. Additionally, we sold $250 million aggregate principal amount of our Floating Rate Senior Notes due March 12, 2010.

On March 14, 2007, we entered into an agreement to purchase shares of our common stock for an aggregate purchase price of $350 million under an accelerated stock buyback program. Pursuant to the agreement, the minimum number of shares to be purchased has been set at approximately 4.8 million while the maximum is approximately 5.9 million. On March 19, 2007, approximately 4.8 million shares were delivered to us. Additional shares may be delivered to us at the end of the program, depending on the price of our shares during the remainder of the program, which is expected to conclude in the third quarter of 2007.

As part of our continuing merger integration, on April 2, 2007, we completed the merger of one of our wholly owned insurance subsidiaries, Jefferson-Pilot Life Insurance Company, a North Carolina domiciled insurer, with and into The Lincoln National Life Insurance Company ("LNL"), an Indiana domiciled insurer. LNL remains an Indiana domiciled insurer. We also completed the merger of Jefferson Pilot LifeAmerica Insurance Company ("JPLA"), a New Jersey domiciled insurer, and Lincoln Life & Annuity Company of New York, a New York domiciled insurer. JPLA has been redomiciled to New York and renamed Lincoln Life & Annuity Company of New York ("LLANY").

On April 2, 2007 we announced the introduction of our new Unified Product Portfolio (UPP), a wide array of life insurance, annuity and linked benefit products. We expect to phase in UPP over the next few months, with fixed products being the first to market. These include universal life products and fixed and indexed annuities. We expect to launch variable products, including variable annuities and variable universal life, and term products during this summer. Our new product portfolio will offer solutions to baby boomers no matter where they may be in the wealth management cycle.

On May 1, 2007 we announced plans to change the retirement benefits provided to employees, which include replacing traditional pension retirement benefits with a new defined contribution plan beginning January 1, 2008. For additional details, see Note 13 of our consolidated financial statements.
 
 
During the first quarter of 2007, we called for redemption $312 million in long-term debt with interest rates ranging from 8.14% to 8.285%.

For a description of the sales and redemptions, see “Review of Consolidated Financial Condition - Liquidity and Capital Resources” below.

Critical Accounting Policies

The MD&A included in our 2006 Form 10-K contains a detailed discussion of our critical accounting policies. The following information updates the critical accounting policies provided in the 2006 Form 10-K.
 
Deferred Acquisition Costs, Value of Business Acquired, Deferred Sales Inducements and Deferred Front-End Loads

In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 addresses the accounting for DAC on internal replacements other than those described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” An internal replacement is defined by SOP 05-1 as a modification in product benefits, features, rights or coverages that occurs by (a) exchanging the contract for a new contract, (b) amending, endorsing or attaching a rider to the contract, or (c) electing a feature or coverage within a contract. Contract modifications that result in a substantially unchanged contract will be accounted for as a continuation of the replaced contract. Contract modifications that result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract, and any unamortized DAC, unearned revenue and deferred sales charges must be written-off. SOP 05-1 is to be applied prospectively and is effective for internal replacements occurring in fiscal years beginning
 
23


after December 15, 2006.

For a detailed discussion of the cumulative effect of adoption of SOP 05-1 recorded to our January 1, 2007 Consolidated Balance Sheets, see Note 2 of our consolidated financial statements. The adoption of this new guidance primarily impacts our Individual Markets Annuities and Employer Markets Group Protection businesses, and our accounting policies regarding the assumptions for lapsation used in the amortization of DAC and VOBA. In addition, the adoption of SOP 05-1 resulted in a $6 million, pre-tax, increase to underwriting, acquisition, insurance and other expenses in the first three months of 2007, which was attributable to changes in DAC and VOBA deferrals and amortization. The impact is expected to be approximately $14 million, pre-tax, for the remainder of 2007. In addition, due to the changes in our GMDB annuity reserves and DSI, we expect benefits to increase by approximately $2 million, pre-tax, for the twelve months ended December 31, 2007. The impact on amortization of DFEL is expected to be less than $1 million.

As equity markets do not move in a systematic manner, we use a “reversion to the mean” (“RTM”) process to compute our best estimate long-term gross growth rate assumption. Under our current RTM process, on each valuation date, future EGPs are projected using stochastic modeling of a large number of future equity market scenarios in conjunction with best estimates of lapse rates, interest rate spreads and mortality to develop a statistical distribution of the present value of future EGPs for each of the blocks of business. Because future equity market returns are impossible to predict, the underlying premise of this process is that best estimate projections of future EGPs, as required by Statement of Financial Accounting Standards (“SFAS”) No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”, need not be affected by random short-term and insignificant deviations from expectations in equity market returns. However, long-term or significant deviations from expected equity market returns require a change to best estimate projections of EGPs and prospective unlocking of DAC, VOBA, DSI and DFEL. The statistical distribution is designed to identify when the equity market return deviations from expected returns have become significant enough to warrant a change of the future equity return EGP assumption. For more information about the implications of declines and advances in equity markets and our RTM process, see “Part II - Item 7 - Critical Accounting Policies” in our 2006 Form 10-K.
 
The table below presents the balances by business segment as of March 31, 2007.
 
   
Individual Markets
 
Employer Markets
 
 
 
 
 
March 31, 2007 (in millions)
 
Annuities
 
Life Insurance
 
Retirement Products
 
Group Protection
 
Lincoln UK
 
Total
 
DAC and VOBA
 
$
2,082
 
$
4,796
 
$
750
 
$
104
 
$
803
 
$
8,535
 
DSI
   
206
   
-
   
-
   
-
   
-
   
206
 
Total DAC, VOBA and DSI
   
2,288
   
4,796
   
750
   
104
   
803
   
8,741
 
DFEL
   
105
   
491
   
22
   
-
   
400
   
1,018
 
Net DAC, VOBA, DSI and DFEL
 
$
2,183
 
$
4,305
 
$
728
 
$
104
 
$
403
 
$
7,723
 
 
Derivatives

Guaranteed Minimum Withdrawal and Guaranteed Income Benefits

The Individual Markets Annuity segment has a hedging strategy designed to mitigate the risk and income statement volatility caused by changes in the equity markets, interest rates, and volatility associated with the Lincoln Smart SecuritySM Advantage GMWB feature and our i4LIFE® Advantage GIB feature that is available in our variable annuity products. The hedging strategy is designed such that changes in the value of the hedge contracts move in the opposite direction of changes in the value of the embedded derivative of the GMWB and GIB. This dynamic hedging strategy utilizes U.S.-based and international equity futures and options as well as interest rate futures and swaps. The notional amounts of the underlying hedge instruments are such that the magnitude of the change in the value of the hedge instruments due to changes in equity markets, interest rates, and implied volatilities is designed to offset the magnitude of the change in the fair value of the GMWB and GIB guarantees caused by those same factors. At March 31, 2007, the embedded derivative for GMWB was an asset valued at $63 million and the embedded derivative for i4LIFE® Advantage GIB was an asset valued at $16 million.

Income Taxes 

Management uses certain assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and federal income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting
 
 
24

 
income tax liabilities and assets. These judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change.

We adopted FASB Interpretation No. 48, - “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109” ("FIN 48") effective January 1, 2007 and recorded an increase in the liability for unrecognized tax benefits of $15 million in our Consolidated Balance Sheets, offset by a reduction to the beginning balance of retained earnings with no impact on net income. FIN 48 established criteria for recognizing or continuing to recognize only more-likely-than tax positions, which may result in federal income tax expense volatility in future periods. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than our accrued position. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. For a detailed discussion of FIN 48, see Note 2 and Note 4 of our consolidated financial statements.
 
RESULTS OF CONSOLIDATED OPERATIONS
 
   
Three Months Ended
     
   
March 31,
 
Increase
 
(in millions)
 
2007
 
2006
 
(Decrease)
 
Insurance premiums
 
$
459
 
$
78
   
NM
 
Insurance fees
   
779
   
475
   
64
%
Investment advisory fees
   
90
   
78
   
15
%
Communications revenue (net)
   
67
   
-
   
NM
 
Net investment income
   
1,090
   
678
   
61
%
Amortization of deferred gain on indemnity
                   
reinsurance
   
19
   
19
   
0
%
Other revenues and fees
   
140
   
95
   
47
%
Realized gain (loss)
   
26
   
(1
)
 
NM
 
Total revenue
   
2,670
   
1,422
   
88
%
Benefits
   
1,194
   
582
   
105
%
Underwriting, acquisition, insurance and
                   
other expenses
   
805
   
503
   
60
%
Communications expenses
   
41
   
-
   
NM
 
Interest and debt expenses
   
61
   
22
   
177
%
Total benefits and expenses
   
2,101
   
1,107
   
90
%
                     
Income before taxes
   
569
   
315
   
81
%
Federal income taxes
   
173
   
94
   
84
%
Net income
 
$
396
 
$
221
   
79
%
                     
Items included in net income (after-tax):
                   
Realized gain (loss) on investments and
                   
derivative instruments
 
$
17
 
$
(4
)
     
Net gain on reinsurance embedded
                   
derivative/trading securities
   
-
   
4
       
Restructuring charges
   
(3
)
 
-
       

25


The table below provides a detailed comparison of items included within net realized investment gains (losses).

   
Three Months Ended
     
   
March 31,
 
Improvement
 
(in millions)
 
2007
 
2006
 
(Worsening)
 
Realized gains on investments
 
$
66
 
$
25
   
164
%
Realized losses on investments
   
(20
)
 
(21
)
 
5
%
Realized gain (loss) on derivative instruments
   
-
   
4
   
-100
%
Amounts amortized to balance sheet accounts
   
(18
)
 
(11
)
 
-64
%
Gain on reinsurance embedded derivative/trading securities
   
-
   
6
   
-100
%
Investment expenses
   
(2
)
 
(4
)
 
50
%
Net gains (losses) on investments and derivative instruments
 
$
26
 
$
(1
)
 
NM
 
Write-downs for other-than-temporary impairments included in
                   
realized losses on investments above
 
$
(4
)
$
(2
)
 
-100
%
 
Following are deposits and net flows by business segment. For additional detail of deposit and net flow information, see the discussion in “Results of Operations by Segment” below.
 
   
Three Months Ended
 
 
 
 
 
March 31,
 
Improvement
 
(in millions)
 
2007
 
2006
 
(Worsening)
 
Deposits
             
Individual Markets:
                   
Annuities
 
$
2,821
 
$
2,136
   
32
%
Life Insurance
   
1,039
   
488
   
113
%
Employer Markets:
                   
Retirement Products - Defined Contributions
   
1,487
   
1,240
   
20
%
Retirement Products - Executive Benefits
   
65
   
47
   
38
%
Investment Management
   
6,033
   
9,064
   
-33
%
Consolidating adjustments (1)
   
(909
)
 
(739
)
 
-23
%
Total Deposits
 
$
10,536
 
$
12,236
   
-14
%
                     
Net Flows
                   
Individual Markets:
                   
Annuities
 
$
754
 
$
770
   
-2
%
Life Insurance
   
698
   
257
   
172
%
Employer Markets:
                   
Retirement Products - Defined Contributions
   
221
   
180
   
23
%
Retirement Products - Executive Benefits
   
(75
)
 
40
   
NM
 
Investment Management
   
(89
)
 
4,899
   
NM
 
Consolidating adjustments (1)
   
45
   
42
   
7
%
Total Net Flows
 
$
1,554
 
$
6,188
   
-75
%
                     
26


           
As of
 
 
 
 
 
 
 
As of March 31,
 
December 31,
 
Increase over
 
Increase over
 
(in millions)
 
2007
 
2006
 
2006
 
Prior year
 
Prior quarter
 
Assets Under Management by Advisor (2)
                               
Investment Management:
                               
External Assets
 
$
98,146
 
$
86,428
 
$
97,306
   
14
%
 
1
%
Insurance-related Assets
   
67,292